Accounting 9706/22 February/March 2019: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 AS Level Structured Questions, February/March 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
The following balances were extracted from the books of K Limited at 30 September 2018.
Debit Credit
$000 $000
8% Debentures (2022-2024) 75
Administrative expenses 42
Cash and cash equivalents 11
Cost of sales 587
Debenture interest 3
Distribution costs 46
Dividends paid 60
Equipment cost 90 provision for depreciation at 1 October 2017 30
Land and buildings cost 980 provision for depreciation at 1 October 2017 135
Inventory at 30 September 2018 19
Issued share capital: ordinary shares of $0.50 each 450
Retained earnings at 1 October 2017 106
Revenue 936
Share premium 90
Trade payables 35
Trade receivables 41
The following information is also available.
1 Administrative expenses includes a payment, $9000, for insurance for the three months ended 30 November 2018.
2 Carriage inwards of $3000 had been included in distribution costs.
3 Land and buildings includes land at a cost of $260 000.
4 The company’s depreciation policy is as follows:
20% per annum using the reducing
Equipment Charged to distribution costs balance method
2½% per annum using the
Buildings Charged to administrative expenses straight-line method
Land No depreciation
REQUIRED
(a) Prepare the income statement for the year ended 30 September 2018.
K Limited
Income statement for the year ended 30 September 2018
$000
Workings:
[10]
Additional information
During the year ended 30 September 2018 the directors had made a rights issue of 1 ordinary share for every 2 shares held at a price of $0.70 per share. The issue was fully subscribed and had been recorded in the books of account.
REQUIRED
(b) Prepare the statement of changes in equity for the year ended 30 September 2018.
Share Share Retained Total capital premium earnings
$000 $000 $000 $000
Workings:
[6]
Additional information
The directors wish to raise additional finance. They are considering making either a further rights issue of ordinary shares or issue another debenture.
REQUIRED
(c) Advise the directors which option they should choose. Justify your answer.
[5]
Additional information
The directors have provided the following information:
Year ended Year ended Industry
30 September 30 September average for
2018 2017 both years
Trade payables turnover 29 days 35 days 34 days
Trade receivables turnover 39 days 31 days 32 days
REQUIRED
(d) Analyse the effect that the changes in each of these ratios had on the company’s liquidity using all the available information.
[3]
(e) State three ways in which a business could reduce trade receivables turnover.
1
2
3
[3]
(f) State three drawbacks of increasing trade payables turnover.
1
2
3
[3]
[Total: 30]
Question 2 is on the next page.
Mark scheme
1(a) K Limited Income statement for the year ended 30 September 2018 10
$000
Revenue 936
Cost of sales W1 (590) (1)
Gross profit 346 (1) OF
Administrative expenses (W3) (54) (2) OF
Distribution costs (W2) (55) (2) OF
Profit from operations 237 (1) OF
Finance costs (W4) (1*) (6) (1)
Profit for year 231 (1) OF
(1*) for recording debenture interest as ‘finance costs)’
W1 Cost of sales = As per trial balance $587 000 + Carriage inwards $3000 = $590 000
W2 Distribution costs
$000
As per trial balance 46
Less carriage inwards (3) (1)
Depreciation 12 (1)
55
W3 Administration expenses
$000
As per trial balance 42
2
Less insurance prepaid × 9 (6) (1)
3
1
Depreciation 2 % × ( 980 − 260) 18 (1)
2
54
W4 Finance costs: ( 8% × 75 ) = 6
1(b) Statement of changes in equity for the year ended 30 September 2018 6
Share Share Retained
Total
capital premium earnings
$000 $000 $000 $000
Balance, 1 October 2017 (W1) 300 30 106 436 (1)
Rights issue (W1) 150 (1) 60 (1) 210
Dividends paid (60) (1) (60)
Profit for the year 231 (1) OF 231
Balance, 30 September 2018 450 90 277 817 (1) OF
W1 Rights issue and opening balances
1
Rights issue: 1 for 2 leading to share capital 450: so issue was × 450 = 150
3
2
Share premium: 20 cents on each 50 cents share = × 150 = 60
5
Opening share capital: 450 – 150 = 300
Opening share premium: 90 – 60 = 30
1(c) Rights issue (Max 2) 5
Rights issue does not dilute ownership. (1)
Rights issue is attractive to shareholders. (1)
Rights issue may be less expensive than debentures. (1)
However, there has been a recent rights issue. Shareholders may not want another one. (1)
May result in a fall in the share price. (1)
Payment of dividends is discretionary. (1)
Debentures (Max 2)
Debentures increase debt. (1)
Lender may require security. (1)
Regular payment of interest and capital. (1)
Debentures need to be repaid. (1)
However, debentures do not affect ownership. (1)
No voting rights to debenture holders. (1)
Accept other valid points.
1 mark for decision + Max 4 marks for justification
1(d) Effect on liquidity 3
Both changes will have an adverse effect on liquidity (1)
Suppliers accounts are now being settled more quickly than customers pay their accounts. (1)
Both ratios are now worse than industry average. (1)
Accept other valid points.
Max 3 marks
1(e) Put in place measures to more closely monitor trade receivable accounts (frequent reminders; issuing of statements of 3
account). (1)
Refuse credit terms to late payers. (1)
Offer cash discounts to encourage prompt payment. (1)
Charge interest on overdue accounts (1)
Ask for cash with order / increase cash sales (1)
Accept other valid points.
Max 3 marks
1(f) Delaying payments to suppliers may mean the loss of cash discounts which would have an impact on profits. (1) 3
Cause some suppliers to refuse credit terms which would have an adverse effect on liquidity. (1)
Force the business to find alternative suppliers who are unable to supply goods on the same quality. (1)
May create a bad relationship with suppliers. (1)
May incur interest charges (1)
Accept other valid points.
Max 3 marks
Mira, Sasha and Peta have been trading as a partnership.
They share profits and losses in the ratio of 2 : 2 : 1 respectively. The partnership ceased trading on 31 January 2019.
REQUIRED
(a) State four reasons why a partnership may be dissolved.
1
2
3
4
[4]
Additional information
The following information is available on dissolution of partnership.
1 Mira, Sasha and Peta
Statement of financial position at 31 January 2019
$
Assets
Non-current assets
Fixtures and fittings 45 200
Motor vehicles 22 000
67 200
Current assets
Inventory 20 600
Trade receivables 42 800
63 400
Total assets 130 600
Capital and liabilities
Capital accounts
Mira 45 500
Sasha 42 800
Peta 14 000
102 300
Current liabilities
Trade payables 26 400
Bank overdraft 1 900
28 300
Total capital and liabilities 130 600
2 Sasha took a motor vehicle at an agreed valuation of $4500. The remaining non-current assets were sold for $64 300.
3 Inventory was sold for $19 800.
4 Received $40 500 from trade receivables.
5 Trade payables were paid $26 000.
6 The costs of dissolution were $3700.
REQUIRED
(b) Prepare the partnership realisation account.
[5]
(c) Prepare, on the next page, the partners’ capital accounts on dissolution. [2]
Mira, Sasha and Peta
Capital accounts
Mira Sasha Peta Mira Sasha Peta
Details Details
$ $ $ $ $ $
12
(d) Prepare the final bank account to show the closure of the partnership.
[2]
(e) Suggest two reasons why the trade receivables did not pay the full amount they owed.
1
2
[2]
[Total: 15]
Mark scheme
2(a) Death / ill health / retirement of a partner (any one) (1) 4
A partner has been declared bankrupt (1)
Disagreement between partners (1)
Insufficient level of profits / incurring losses (1)
Insufficient levels of cash reserves (1)
Partnership has achieved its purpose (1)
Accept other valid points.
Max 4 marks
2(b) Mira, Sasha and Peta Realisation account 5
$ $
Fixtures and fittings 45 200 Capital account - Sasha 4 500 (1)
Motor vehicles 22 000 Trade payables 26 400
Inventory 20 600 (1) Bank – non-current assets 64 300
(1)
Trade receivables 42 800 Bank – inventory 19 800
Bank – trade payables 26 000 Bank – trade receivables 40 500
Bank – Dissolution costs 3 700 (1) 2 1 920
Capital account Mira
5
2 1 920 (1)
Sasha
5 OF
1 960
Peta
5
160 300 160 300
2(c) Mira, Sasha and Peta Capital accounts 2
Details Mira Sasha Peta Details Mira Sasha Peta
$ $ $ $ $ $
Realisation account 4 500 (1) Balance b/d 45 500 42 800 14 000
Realisation account 1 920 1 920 960 (1) OF
Bank 43 580 36 380 13 040
45 500 42 800 14 000 45 500 42 800 14 000
2(d) Mira, Sasha and Peta Bank account 2
$ $
Realisation account 64 300 Balance b/d 1 900 (1)
Realisation account 19 800 Realisation account 26 000
Realisation account 40 500 Realisation account 3 700
Capital account Mira 43 580
Sasha 36 380 (1) OF
Peta 13 040
124 600 124 600
2(e) Credit control was not up-to-date. (1) 2
There were uncorrected errors in the receivables ledger overstating certain accounts. (1)
Becoming aware that the partnership was ceasing, certain receivables avoided paying. (1)
Customer bankrupt (1)
May have been some irrecoverable debts (1)
Offered cash discount (1)
Accept other valid points.
Max 2
Noor, a sole trader, was preparing her business’s financial statements for the year ended
31 December 2018.
The following information is available.
At 1 January 2018
$
General expenses prepaid 480
During the year ended 31 December 2018
$
General expenses paid 12 400
Insurance premiums paid 6 480
Rent received 5 460
At 31 December 2018
1 General expenses, $1210, were due but unpaid.
2 Insurance premiums paid included $630 covering the six months ended 31 January 2019.
3 Rent receivable of $1200 for the three months ended 28 February 2019 had not yet been received.
4 Inventory had been valued at a cost of $11 400. However, it included several damaged items which had a selling price of $840. All goods are sold with a mark-up of 50%. The damaged items could be sold but would require repairs costing $360.
REQUIRED
(a) Calculate the amount to be recorded in the income statement for the year ended
31 December 2018 for each of the following items.
(i) General expenses
[3]
(ii) Insurance
[1]
(iii) Rent receivable
[1]
(iv) Closing inventory
[3]
Additional information
Noor’s policy is to maintain a provision for doubtful debts at 5% of trade receivables at the end of the financial year.
REQUIRED
(b) State two accounting concepts which are applied when recording a provision for doubtful debts.
1
2 [2]
Additional information
At 31 December 2017 Noor’s trade receivables were $34 200 after deducting the provision for doubtful debts.
At 31 December 2018 total trade receivables were $37 200. This total included the accounts of the following two credit customers.
$
MN Limited 680
S Wells 360
Noor decided to write off these two accounts. She will maintain her provision for doubtful debts at
5% of trade receivables.
REQUIRED
(c) Calculate the increase or decrease in the provision for doubtful debts at 31 December 2018.
[5]
[Total: 15]
Mark scheme
3(a)(i) General expenses 3
$
Opening balance prepaid 480 (1)
Payment 12 400
Closing balance due 1 210 (1)
14 090 (1) OF
3(a)(ii) Insurance 1
$
Premiums paid 6 480
1
Less prepayment × $630 (105)
6
6 375 (1)
3(a)(iii) Rent receivable 1
$
Rent received 5 460
1 400
Add amount due × $1200
3
5 860 (1)
3(a)(iv) Closing inventory at 31 December 2018 3
$
Valuation at cost 11 400
Valuation of damaged products
2
Cost $840 × = 560 (1)
3
NRV $840 – $360 = 480 (1)
Reduction in value (80)
Closing valuation 11 320 (1) OF
3(b) Accounting concepts: accruals (matching) (1); prudence (1) 2
3(c) 5 5
The original provision for doubtful debts was: × $34 200 = $1800 (1)
95
The new provision for doubtful debts will be:
$
Total balances of trade receivables at 31 December 2018 37 200
Less irrecoverable debts ($680 + $360) 1 040
Net 36 160 (1)
New provision for doubtful debts (5% × $36 160) 1 808 (1) OF
Entry in income statement will be for an increase (1) OF $8 (1) OF
W Limited operates a system of marginal costing. The company makes two products, Product A and Product B. The directors provided the following budgeted information for a year.
Product A Product B
Production and sales (units) 10 000 6 000
$ $
Allocated fixed overheads 130 000 120 000
Per unit selling price 60 80 direct material 14 16 direct labour 15 21 variable overheads 10 15
REQUIRED
(a) Prepare a statement for the year to show:
the budgeted total contribution for each product the budgeted total profit for each product the budgeted total profit.
Product A Product B Total
$ $ $
[8]
Additional information
Included in the allocated fixed overheads is rental of machinery at a cost of $100 000 a year. This cost is allocated 75% to Product A and 25% to Product B.
The directors are now considering two options.
Option 1: Continue with the existing machinery rental on the same terms.
Option 2: Taking out a new rental agreement for new machinery. The new rental agreement would consist of a fixed fee of $28 000 a year plus $4 for each unit produced. The fixed fee would be split across the products in the same proportions as under the current agreement.
REQUIRED
(b) Complete the following table to show the effect of Option 2.
Product A Product B Total
Revised unit contribution
Revised allocated total fixed overheads, total for the year
Revised budgeted profit for the year
Workings:
[9]
(c) Advise the directors which option they should choose. Justify your answer using both financial and non-financial factors.
[7]
(d) Explain how unit contribution can be used by a business manufacturing multiple products when there is a shortage of production materials.
[4]
(e) State two other uses of marginal costing to a business.
1
2
[2]
[Total: 30]
Mark scheme
4(a) Product A Product B Total 8
$ $ $
revenue 600 000 (1) 480 000 (1) 1 080 000
direct materials 140 000 96 000 236 000
direct labour 150 000 126 000 276 000
variable overheads 100 000 90 000 190 000
total contribution 210 000 (1) 168 000 (1) 378 000
fixed costs 130 000 120 000 (1) both 250 000
budgeted profit 80 000 (1) OF 48 000 (1) OF 128 000 (1) OF
OR
Product A Product B Total
unit contribution $21 (1) $28 (1)
no of units × 10 000 × 6 000
total contribution $210 000 (1) $168 000 (1) $378 000
fixed costs $130 000 $120 000 (1) both $250 000
budgeted profit $80 000 (1) OF $48 000 (1) OF $128 000 (1) OF
4(b) 9
Product A Product B Total
$ $ $
Revised unit contribution 21 – 4 = 17 (1) OF 28 – 4 = 24 (1) OF
Revised fixed costs, total 130 000 – 75 000 (1) + 120 000 – 25 000 (1) +
for the year 21 000 (1) = 76 000 7 000 (1) = 102 000
Revised budgeted profit (17 × 10 000) – 76 000 (24 × 6 000) – 102 000 = 136 000 (1) OF
for the year = 94 000 (1) OF 42 000 (1) OF
4(c) Financial factors: Max 3 7
If the production level is as budgeted, machine rental is ($8000) lower / profit is ($8000) more with the new agreement. (1)
Fixed costs will reduce by $72 000 (1)
If the production level is below budget, the saving is greater with the new agreement.
Therefore, the new agreement reduces risk. (1)
Even if production levels rise and increase the total cost, unit contribution is still positive. (1)
If production levels rise, machine rental will become higher than before under the new agreement. (1)
The removal of the old machinery and installation of the new may incur additional costs. (1)
There could be costs of staff training with the new machinery. (1)
Non-financial factors: Max 3
The new agreement could mean new machinery which is more up-to-date / reliable / economical to run. (1)
The removal of the old machinery and installation of the new would be very disruptive . (1)
There could be teething problems with the new machinery. (1)
There would be a learning curve. (1)
Will new machinery produce equivalent quality
The new machinery has unknown reliability/availability of spare parts. (1)
Accept other valid points.
Overall max 6 for justification + (1) for decision
4(d) The business can calculate contribution per unit of scarce resource. (1) 4
Thus, it can rank its products (1)
and prepare a production schedule (1)
to maximise profit (1)
by prioritising products with the highest contribution per unit of scarce resource. (1)
Max 4
4(e) Make or buy decisions (1) 2
Accepting orders at below normal selling price (1)
Closing department / discontinuing product (1)
Accept other valid points.
Max 2
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